TMI Blog2015 (3) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A - Held that:- If there is no exempt income then provisions of section 14A cannot be invoked. Therefore, in our opinion, if there was no income during the year then no disallowance is called for. Since in the case before us investment itself has been written off, therefore, there could not be any income. Accordingly we delete this addition. Disallowance of proportionate interest in terms of provisions of section 36(1)(iii) - Held that:- No particular loan has been taken for the asset which has been shown under the head ‘capital work in progress’ then disallowance could not have been made. However, each loan and its utilization requires fresh examination, therefore, we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law. TDS u/s 194H - non deduction of tds - Held that:- It is not clear from the records whether these amount pertains to bank charges because Schedule 20 simply shows financial charges, therefore, we remit this matter back to the file of Assessing Officer with a direction to verify whether assessee has paid bank charges t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance on account of training expenses - Held that:- In any case when separate disallowance has been made for ₹ 14,82,137/- on account of training expenses this would amount to double disallowance. Therefore, in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file for re-examination of the issue and, the same should be decided after considering the contention of double disallowance on account of training expenses as well as after verification of the supporting bills filed before the DRP. Bad debt which are clearly allowable, by writing off such amounts because simply an amount has been shown as discount the same cannot be disallowed. Therefore, we set aside the order of Assessing Officer and delete this addition. TDS u/s 195 - reimbursement of expenses incurred on the training of a particular employee abroad - Held that:- Merely reimbursement of expenses incurred on the training of a particular employee abroad cannot be termed as fee for technical services. Even if, assuming for the argument sake that this would amount to fee for technical services, then it is to be seen that such service was rendered in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration based on a view formed in the immediately preceding assessment year on following transactions:- 5.1 disallowing sums of ₹ 4,54,744 and ₹ 44,09,664 paid as commission to Malachite Chemicals and Edward Keller (Phils)Inc. 5.2 disallowing commission expense of ₹ 34,20,165 being excessive and unreasonable by arbitrarily fixing an average rate of commission paid to Indian agents at 3%. 6. That the Ld. Assessing officer/DRP erred on facts in law in making a disallowance of expenditure of ₹ 21,15,375 by invoking the provisions of section 14 A of the Act read with Rule 8 D of the Income Tax Rules, 1962. 7. That the Ld. AO/DRP erred on facts in law in making a disallowance of interest / finance expenses of ₹ 1,14,75,000 alleging that the borrowed funds were utilized to undertake the capital expansion project on surmises and conjectures. 8. That he Ld. AO/DRP erred on facts in law in making a disallowance of regular bank charges paid to banks of ₹ 1,20,00,000 under section 40(a)(ia) of the Act alleging that the appellant has an obligation to deduct TDS on bank charges under section 194H of the Act. 9. That the Ld. AO/DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year, the same is not allowable. 16. That the Ld. AO/DRP erred on facts in law in making a disallowance of ₹ 14,82,137under section 40(a)(i) of the Act on the alleged ground that the appellant was liable to deducttax under section 195 of the act on expenses incurred towards training of employees, treating the same as professional services. 17. That the Ld. DRP and AO erred on facts and in law in charging interest under sections 234B and 234C of the Act. 18. The Ld. DRP and AO also erred in proposing to initiate penalty proceedings under section271(i)(c) of the Act for concealment of income or funishing inaccurate particulars of income. 19. That the Ld. AO/DRP erred on facts in law in not adjusting the loss brought forward and unabsorbed depreciation as claimed under clause (iii) of Explanation 1 of Section 115JB ofthe Act while computing book profit in the revised computation of income filed during the course of the assessment proceedings. 20. That the Ld. AO/DRP erred on facts in law in adding an amount of ₹ 5,00,00,000representing investment written off during the year, to the book profits of the appellant as computed under section 115J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has received benefit of ₹ 8.8 crores. 7. On the other hand Ld. DR submitted that basically the issue is covered by the order of Tribunal in ITA No. 1139/Chd/2011 and 1290/Chd/2012 for assessment years 2007-08 and 2008-09. He also referred to various paras like 95, 98, 102 110 and submitted that Tribunal has given a clear finding in para 110 that payment for total corporate services have to be restricted to the extent of 50% of the financial service benefit received by the assessee because assessee should have retained atleast 50% of the benefits on account of such financial service. He pointed out that assessee has moved an Misc. Application also in this regard and the Tribunal has dismissed that M.A. No. 06 07/Chd/2015 arising out of ITA Nos. 1139/Chd/2011 and 1290/Chd/2012 respectively and the Tribunal has given logic of this restriction vide paras 5 6 of the Misc. Application order. 8. We have considered the rival submissions carefully and find that in assessment years 2007-08 and 2008-09 when this issue was being adjudicated by the Tribunal, some force was found in the contention of Ld. DR that basically assessee was receiving corporate services from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2008-09 which reads as under:- 110. In view of the abovesaid principles laid down, we find no merit in the adjustments made by the TPO. Another aspect is to be kept in mind while deciding the issue. The plea raised by the ld. AR for the assessee was that savings to the assessee as result of services provided by the AE should be considered while holding the transaction to be at arm s length. It was fairly conceded by the ld. AR for the assessee that under internationally accepted norms, savings are to be shared between the parties in the ratio of 50 : 50. The ld. AR for the assessee further pointed out that the savings on account of guarantee fee in assessment year 2007-08 were ₹ 1.40 Cr and the total savings in assessment year 2008-09 were ₹ 9.29 Cr. The TPO in assessment year 2007-08 has made an adjustment of ₹ 2,91,95,471/- and in the assessment year 2008-09 has made an adjustment of ₹ 6,14,13,983/-. In view of the admission of the assessee, we are of the view that 50% of the benefits arising to the assessee on account of financial benefits is to be retained by the assessee in independent party transaction. However, in the facts of the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has started receiving financial services in the form of corporate guarantee as well as sanctions of the limit by banks on the recommendation of holding company because of which the assessee got the limits sanctioned from the bank at much lower rates than the market rates. At the instance of Bench the Ld. Counsel has also quantified the amounts of benefits received by the assessee company during these two years. The amounts of corporate service charges in various assessment years are as under:- Assessment year Amount (in Rs. ) 2007-09 22,700,000 2008-09 63,970,136 2009-11 79,931,741 2010-12 89,829,606 6. From the above figures the Bench agreed with the contention of the Revenue that service charges paid on account of corporate services had increased manifold in the later years. Therefore, assessee was asked why there is such a huge increase in the total corporate service charges. The assessee in reply had explained that in later years the assessee had started receivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t savings availed by the appellant, due to guarantee provided by the associated enterprise has been computed on the basis of prevailing PLR. The PLR prevailing during financial year 2006-07 was 10.75% whereas the PLR during financial year 2007-08 was the relevant period was 12.75% whereas the appellant had borrowed money at 8.10%. Considering the above factors, the interest cost savings enjoyed by the appellant due to guarantee provided by the associated enterprise for financial year 2006-07 and 2007-08 is as under: Financial Year Amount of loan (INR in Cr) Interest rate PLR Savings % Savings (INRE in Cr) 2006-07 52.63 8.10% 10.75% 2.65% 1.39 2007-08 52.63 8.10% 12.75% 4.65% 2.45 Further, the associated enterprise has also provided guarantee to enable the appellant to avail Letter of Credit ( LC ) facility from Royal Bank of Scotland ( RBS ) without providing any security. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly be taken into consideration while adjudicating the appeal of the assessee. b. Issue of guarantee by DSM Finance B.V. The Ld DR contended that the appellant has entered into contract service agreement with DSM N.V. whereas the guarantee was been issued by another associated enterprise, DSM Finance B.V. In this regard it is respectfully submitted that DSM Finance B.V. is a part of corporate treasury division of the DSM group and has a mandate from DSM N.V. (now Royal DSM NV or Koninklijke DSM N.V) to manage/arrange/support the funding of DSM group companies. A power of attorney executed by DSM NV authorizing DSM Finance BV to sign any obligation / arrangement in the field of cash management is attached as Annexure 5. It is further submitted that the name of DSM NV was changed to Royal DSM NV on completion of 100 years of its existence in 2004. An extract from the Chamber of Commerce for Limburg, Netherland is attached as Annexure 6. In view of the aforesaid, it is respectfully submitted that the guarantee was issued by DSM Finance B.V. at the directions/instruction of DSM N.V. and accordingly, an arm s length guarantee fee was payable by the appellant to DSM N.V. in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that financial services forming part of the CSC also include provisioning of guarantee(s) by AE on behalf of DSP India (please refer to point b(iii) of Article 4 of the corporate service contract (placed at page 33 of the paperbook). In this regard, the assessee has also submitted the details of an unconditional and irrevocable guarantee provided by DSM N.V., an AE of DSM India, to the bank (Citibank International Plc.) on behalf of DSM India amounting to Euro 10 million (approx 68 crores) in connection with any overdraft, loan, credit facility etc. In this regard, a copy of the letter providing this inter-company guarantee facility to DSM India has also been submitted by the assessee to the Ld. TPO as Appendix 6B to the submission dated August 16, 2012 (placed at pages 300 to 303 of paperbook). Furthermore a letter by Royal Bank of Scotland, providing the details of credit facilities existing for DSM India in various financial years wherein security has been provided by Koninklijke DSM NV, was also submitted with the Ld. TPO as appendix 6 to the submission dated September 17,2012(placed at page 338 of the paperbook). The detailed benchmarking report along with credit ratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee pointed out that identical issue has been decided by the Tribunal for assessment years 2003-04 to 2008-09. He further pointed out that in assessment year 2003-04, the Revenue had filed the appeal before the jurisdictional High Court and the Hon'ble Punjab Haryana High Court has confirmed the decision of the Tribunal and, therefore, now the matter is squarely covered in favour of the assessee. 17. On the other hand Ld. DR strongly supported the order of Assessing Officer. 18. After considering the rival submissions we find that Tribunal in ITA No. 366/Chd/2004 has decided this issue in favour of the assessee and has noted the facts as under:- It is noted that HMGB Limited manufacturers and supplies Penicillin G which is a critical raw material for the appellant. The table below provide an overview of the total raw material (Penicillin G) purchased by the appellant from all suppliers and the raw material purchased from HMGB Limited during the previous year relevant to the assessment year 2003-04 under consideration:- Particulars Quantity in Kg % of total purchases Penicillin G- Imported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant year, the assessee has earned interest on the advances made to HMGB of sum of ₹ 5.08 crores, which has been offered for tax. It is thus evident that, the borrowings made by the assessee company from the parent company had been utilized for the purpose of business or profession. The claim of the appellant has been accepted consistently in the past and allowed by the Assessing Officer and the deduction claimed on account of interest expenditure has been allowed. There are no changes in the facts and circumstances other than that the part of the interest accrued and due on the advances made to HMGB has been written off in the instant year. This fact alone cannot be a basis to suggest that the borrowings from the parent company has not been utilized for business purposes particularly when it is not in dispute that the assessee had earned interest of ₹ 5.08 crores even in the year under consideration which forms part of the income assessed. It is also not in dispute that the assessee had raised interest free loan of ₹ 95 crores from its parent company in the past which too has been put to use by the assessee in its business and it has been claim of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 19. The above order of Tribunal has been confirmed by Hon'ble Punjab Haryana High Court in ITA No. 257 of 2009 vide order dated 28.10.2013 which is placed in the paper book at pages 465 to 474. Therefore, the issue is squarely covered in favour of the assessee. According, following the earlier orders, we decide this issue in favour of the assessee. 20. Ground No.5: After hearing both the parties we find that certain commission payments were disallowed by the Assessing Officer. The commission to the extent of ₹ 48,64,408/- paid to various foreign parties was totally disallowed and commission paid to local parties in excess of 3% commission was disallowed which amounted to ₹ 34,20,165/-. 21. Before us Ld. Counsel for the assessee submitted that this issue has also been decided by the Tribunal in earlier years and commission paid to foreign parties has been remanded back to Assessing Officer in assessment year 2006-07 in ITA No. 1455 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee before us is that the commission agents are also traders of the drugs and are also acting as commission agents. The assessee is engaged in the manufacture of intermediaries and bulk drugs, which in turn are utilized by other concerns for the preparation of the final products. The assessee, through the said commission agents had sold the items manufactured by it to different concerns. The assessee has placed on record the confirmation from P.I. Mensangan Sakti in respect of receipt of commission of ₹ 40,97,199/-. The said certificate is placed at pages 305 of the Paper Book. We find merit in the case of the assessee. However, the necessary details in this regard are not available, in particular the plea of the Assessing Officer that the assessee had made sales to the said parties on which commission had been paid. We, therefore, remit this issue to the file of Assessing Officer to verify the claim of the assessee that the commission paid to the said concern had no connection with the sales made to the said concerns and if the contention of the assessee is found to be correct, the Assessing Officer is directed to allow the claim of expenditure booked on account of commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer, we delete the addition of ₹ 42,77,213/-. The Ground No. 4 raised by the assessee is, thus partly allowed. 24. Following the above order we set aside the issue regarding payment of commission to the non resident parties to the file of Assessing Officer for reexamination in terms of direction contained in para 86 of the order of Tribunal for assessment year 2006-07. Therefore, this aspect is allowed for statistical purposes. 25. Further, as far as the domestic commission is concerned, we delete this addition following the order of Tribunal vide para 87 for assessment year 2006 07. This aspect is decided in favour of the assessee. 26. Ground No.6 : After hearing both the parties we find that Assessing Officer noticed that assessee had invested a sum of ₹ 5 crores in HMGB ltd. He was of the opinion that income from this investment would be exempt, therefore, he invoked the provisions of section 14A read with Rule 8-D and made disallowance of ₹ 21,15,375/- 27. Before us it was mainly submitted that this investment was written off during the year and, therefore, no exempt income was earned and hence disallowance u/s 14A could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad with section 40(a)(ia) and disallowed this amount as no tax was deducted. 35. Before us Ld. Counsel for the assessee submitted that no tax is required to be deducted against the financial services charges. He referred to page 444 of the paper book which is copy of Schedule 20 related to financial expenses which shows that amount of ₹ 1.20 crores relates to bank charges. It was contended that assessee has obtained regular bank service from banks and bank charges to the tune of ₹ 1,19,98,1219/- were paid which has been shown as ₹ 1.2 crores in the schedule of financial expenses. Since no tax is required to be deducted, this amount could not have been disallowed. In this regard he relied on the decision of Hon'ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs Union of India 257 ITR 202 and the decision of the Mumbai Bench of the Tribunal in the case of Kotak Securities Ltd vs DCIT in ITA No. 6657/Mum/2011. 36. On the other hand Ld. DR while supporting the order of Assessing Officer submitted that no details are available showing to which bank such charges were paid. 37. We have considered the rival submissions carefully and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the observations of the DRP at page 79 of the assessment order in para 7.2. However, he observed that since total deduction shown under this head was only ₹ 19,91,953/-, therefore, he disallowed only a sum of ₹ 19,91,953/-. 41. Before us, the Ld. Counsel for the assessee submitted that ex.gratia is like bonus and it consists of the amount which is not covered by the Bonus Act or the excess payment over and above the amount prescribed under the Bonus Act, therefore, ex.gratia should be construed as bonus only and in this regard he relied on the decision of of Hon'ble Calcutta High Court in the case of CIT vs Shaw Wallace and Co. Ltd. 190 ITR 455(Cal.). He further submitted that in any case the sum of ₹ 21,23,841/- was amount of ex.gratia which was payable during the year and if the same is not held to be the part of the bonus u/s 43B, then the same should be allowed on accrual basis. 42. On the other hand Ld. DR strongly supported the assessment order. 43. After considering the rival submissions we do not agree with the submissions that ex. gratia should be construed as part of the bonus. We have carefully perused the judgement of Hon'ble Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f no such expenses was allowed then writing back of the provisions cannot be treated as income, However, if such expenditure was allowed in the earlier years then the same is required to be added in the income. Therefore, he should decide the issue after examining these facts. 48. Ground No.11: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed in the notes to the accounts it was mentioned that a penalty on custom duty amounting to ₹ 20 lakhs due to import of duty free material against the DEPB licences was there. Therefore, this penalty was proposed to be added to the income of the assessee. Before DRP it was pointed out that penalty was of contingent nature and no claim has been made in the account, therefore, this amount could not be disallowed. The DRP simply held that in notes to the accounts there is a clear mention a sum of ₹ 20 lakhs as penalty, therefore, this amount was required to be added to the income and accordingly the Assessing Officer disallowed this sum. 49. Before us Ld. Counsel for the assessee submitted that only a sum of ₹ 2 lakhs was shoawn as penalty which was shown under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a capital asset. Some case laws were also referred to. The Assessing Officer after examining these submissions did not agree with the same and observed that payment of royalty could not be considered as revenue expenditure because by paying this sum, the assessee enjoyed rights of using the patent and advance technology. 53. On appeal, similar submissions were made before the DRP but DRP also agreed with the views of the Assessing Officer and therefore, ultimately a sum of ₹ 4,67,30,000/- was disallowed. 54. Before us, Ld. Counsel for the assessee referred to the license agreement, copy of which is available at pages 660 to 668 of the paper book. He carried us through various clauses and pointed out that assessee got right to use the patents owned by DAI BV. He also pointed out that such license agreement was not divisible, non exclusive and non transferable, therefore, assessee did not have any other right but to use the technology for production of purimox . The property and ownership of the patents always remained with the DAI BV. Therefore, it cannot be said that assessee had paid this royalty for acquisition of any capital asset or for any enduring benefit. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar product. Further, the ownership of the patent remains with the owner. Also for usage of this patent, a lumpsum payment in the form of royalty has been agreed for in terms of clause 5.1. Therefore, it is clearly a payment of royalty for use of the patent. In our opinion, this is clearly a case of revenue expenditure. 58. In the similar case which came up for the consideration of the Hon'ble Supreme Court in the case of CIT v I.A.E.C (Pumps) Ltd. (supra) wherein under an agreement the assessee was granted a licence to use its patents and designs exclusively in India. The agreement was for a duration of 10 years with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others. The assessee was not to disclose to third parties any of the documents made available by the foreign company to the assessee without having received a written authorisation from the foreign company. The High Court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional evidence filed before it without assigning any reason. In any case when separate disallowance has been made for ₹ 14,82,137/- on account of training expenses this would amount to double disallowance. Therefore, in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file for re-examination of the issue and, the same should be decided after considering the contention of double disallowance on account of training expenses as well as after verification of the supporting bills filed before the DRP. 65. Ground No.14 was not pressed before us and, therefore, the same is dismissed as not pressed. 66. Ground No.15 ; After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has claimed huge amount under the head discount . It was noticed that in some of the csses which has been listed by him at pages 109 and 110 of the assessment order, invoices pertains to the earlier period, therefore, the discount could not have been claimed during the year. The DRP also confirmed this disallowance; therefore, Assessing Officer disallowed this amount. 67 Before us it was submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation and proposed to made addition in the draft assessment order. The DRP after considering the submissions observed as under;- The DRP has considered the submission of the assessee carefully. It is seen that payments have been made to holding company for providing training to employees of the assessee. The assessee has submitted that leadership training does not fall into category of technical service under relevant Article of DTAA and also it does not satisfy make available clause contained in Article 12(5) of Indo-Netherlands treaty. DRP has noted that imparting of training in specialized filed is itself technical in nature. Further, when the employees of the assessee have been trained, how can it be said that technical knowledge has not been imparted to the assessee. Therefore, make available clause is satisfied. Accordingly payments are in nature of FTS under both domestic act and DTAA and hence subject to withholding tax u/s 195 of the Act. Accordingly, DRP is of the view that since tax has not been deducted while making payment, Assessing Officer action is as per law. The grounds of objection are rejected . In view of the above the Assessing Officer disallowed this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de while disallowing the write off of the investment. It is a case of total loss of investment because net worth of the HMGB where investment was made has become negative. The clause (i) of Explanation 1 to section 115 JB mandates adjustment for provision for diminution of investment and whereas in the case before us the total investment is written off. 79. On the other hand Ld. DR strongly submitted that the Company HMGB has not been liquidated, therefore, the same is to be treated as provision for diminution of value of any asset and, therefore, has been rightly added to the book profit. 80. We have considered the rival submissions carefully. Clause (i) to Explanation 1 reads as under;- [1] For this purposes of this section, book profits means the net profit as shown in the profit and loss account of the relevant previous years prepared under sub-section (2), as increased by- (a) to h) (i) the amount or amounts set aside as provision for diminution in the value of any asset. The plain reading of the above provision would clearly show that adjustment can be made to the book profit under clause (i) to Explanation (1) only in respect of provision of d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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